It took 14 years for investors to forget the MAIN lesson from 2008: The cure for high prices is explosion. Only instead of subprime exploding, this time it will be an entire generation that explodes...
As I write, the Fed just raised rates by .75% in a panic move sparked by last Friday's CPI. Up until Friday, markets were pricing in a .5% rate hike which is already the largest rate hike in two decades. This one is the largest in three decades. Combined with QT at $45b/month, today's policy action was the most EXTREME tightening in U.S. HISTORY.
The Fed is playing a very dangerous game called outrunning recession. They are trying to raise rates as quickly as possible BEFORE recession sets in. And yet they fail to acknowledge that their own policies are accelerating the recession.
Under the Cinderella hypothesis, the Fed raises rates to the "neutral" level aka. 3% as quickly as possible. Which gives them a theoretical buffer for THEIR ensuing recession. That strategy makes two ASININE assumptions. One that markets don't explode in the meantime. And two that recession isn't ALREADY in progress.
Unfortunately, there are many signs that the economy is tipping into recession:
> Negative Q1 GDP
> Record low consumer sentiment
> Oil shock/inflation shock
> Bear market in stocks
> Elevated VIX
> Inverted yield curve
> Slowing housing sales
> Collapsed personal savings rate
> Recession-level car sales
> Collapsing durable goods consumption
> Corporate profit recession/Margin collapse
The Fed's own "GDP Now" real-time GDP predictor is currently at 0% for Q2:
If the past is any guide, what we know is that this Idiocracy will wait until recession is 12 months old before they declare it a recession.
Meanwhile, the vast majority of pundits are FULLY behind this SUICIDAL Fed policy. Jim Cramer is calling for "Monster" rate hikes as far as the eye can see.
Jim Cramer is in a VERY LARGE consensus of idiots, none of whom question Fed policy.
What makes this entire gambit lethal is the fact that monetary policy operates on a lagged basis. So by the time the Fed realizes they've tightened too much it will be far too late to save the economy. The Fed has never attempted to raise rates when consumer views of the economy were anywhere NEAR this poor:
It took 14 years for everyone to forget the Lehman event in 2008 when the Fed was primarily focused on inflation:
"The Fed’s understanding of the crisis, however, was clouded by its reliance on indicators that tend to miss sharp changes in conditions. The government initially estimated, for example, that the economy expanded in the first half of 2008 because it basically assumed that some economic trends, like the pace of business creation, had continued apace. The Fed also relied on economic models that assumed the existence of smoothly functioning financial markets, limiting its ability to project the consequences of a breakdown. And the outlook of Fed officials also reflected a deeply ingrained bias to worry more about the risk of inflation than the reality of rising unemployment."
All FOUR of those mistakes are now being repeated. First off, the Fed's own financial stress index is at record lows. Secondly, as I showed above the Fed is ignoring incipient recession. In 2008, the recession began nine months before Lehman. Third, the Fed is assuming that markets can handle this much liquidity withdrawal all at one time. An asinine assumption that will soon be system tested.
The Fed is now pushing the entire world into a credit crisis and their own financial stress index is now INVERSELY correlated to every type of risk:
Last but not least of the 2008 mistakes, the Fed is once again overly obsessing about inflation.
In 2008 as they are now, inflation was their main concern and then it went away OVERNIGHT when markets went into meltdown mode. Monetary policy is a blunt instrument. The Fed has no control over WHICH prices come down. This week, the 30 year mortgage hit 6.3% amid signs that the housing hyper bubble is beginning to crack:
"The National Association of Home Builders warned on Wednesday that soaring inflation and higher mortgage rates are slowing home sales, with CEO Jerry Howard calling the combination a "perfect storm."
However, where today's pundits are truly clueless is forgetting the immediate impact that all of this tightening has on markets.
Investors are NOT positioned for imminent deflation. They've been told all year that INFLATION is the biggest risk to markets. Which is why cash balances are near an all time low.
We hear all the time how "bearish" investors are, yet a survey of wealthy Millennials indicates they have no fear whatsoever. They've only experienced 14 years of continuous monetary bailouts so they assume recessions and bear markets are relics of a bygone era. Banished by central bank money printing:
In summary, inflationists deserve FULL credit for ensuring that once again no one sees this coming.
And for ensuring that gamblers are trapped in end of cycle trades in a deep recession with NO monetary bailout.
Prepare for rioting.
